SURVIVOR: U.S.A.

OPEC is becoming the victim of its self-launched oil price war

Ayear after instigating a market share war that crushed oil prices and devastated the oil business the world over, the oil cartel that is the Organization of the Petroleum Exporting Countries is meeting again on Dec. 4 in Vienna to assess the situation. Saudi Arabia and its rich Gulf allies, which control the cartel, could back off their strategy of increasing market share at the expense of prices and give oil a lift. But don’t count on it.

Based on public statements thus far, the Saudis and their octogenarian oil minister, Ali al-Naimi, will likely press on with the market grab. “Naimi will still argue probably that the strategy is producing the re-balancing,” noted Helima Croft, global head of commodity strategy at RBC Capital Markets. And that “it’s been slower, but it’s working, don’t pull out now.”

Most likely, prices will continue to be impacted by other factors, chiefly the slowdown in U.S. tight oil growth, rising global demand, a return of geopolitical risk due to escalating hostilities in Syria, and the flareup of conflicts elsewhere in the Middle East. As is often the case with war, OPEC’s is senseless and expensive. Its own wounds from oil’s price collapse far outweigh the minuscule gain in market share, making the strategy about as successful as cutting off the nose to save the face.

The fiscal damage alone to OPEC countries has been enormous. Poorest members Venezuela, Nigeria and Algeria are economically ruined. Gulf producers are drawing down reserves. Saudi Arabia’s foreignexchange pile has been eroded by at least US$73 billion, from a peak of US$746 billion, and the country has returned to borrowing heavily to meet budget commitments. As Croft put it: “How is that a victory lap?”

OPEC’s loss of influence is also significant. The cartel had a good thing going when its focus was on sustaining oil prices, and now it doesn’t. Today, it’s U.S. tight oil producers, with their ability to quickly adjust to price signals, that are getting all the market attention. In this new world of oil abundance, any price increase would turn on the tight oil taps, pushing prices back down again. It’s the reason many believe we are settling into a lower-for-longer oil price world.

The oil shock has created tougher competitors. Sure, it’s caused widespread layoffs and spending cuts in Canada and the U.S. But there are lots of survivors, too, and they are quickly adapting. Costs have been squeezed across the board, and the business no longer needs US$100 oil. Suncor Energy Inc., the dominant oil-sands company, has pushed down operating costs to US$22 a barrel. “Suncor is one of the few oil companies in the world who are producing free cash at these low oil prices, so we are in a very strong position,” says CEO Steve Williams.

New technologies enabling production from unconventional fields are getting better, not being abandoned. Still in their infancy, “squeezed economics may be the catalyst to more rapid process refinements and improvements,” predicts David Yager, oilfield services analyst at MNP LLP in Calgary. As is often the case with better mousetraps, adoption will spread, stimulating oil production in new places and making technologychallenged OPEC members the dinosaurs in the business. And it’s only a matter of time before the U.S. lifts its oil export ban, resulting in new North American oil supplies spilling into markets OPEC used to dominate.

By crashing oil prices to expand and secure its market share, OPEC earned itself a permanent pay cut. The question its leaders should be asking themselves, given their fiscal obligations and diminished ability to be masters of their own destinies: how will they now survive the low oil price environment they created?

THE OIL SHOCK HAS CREATED TOUGHER COMPETITORS. SURE, IT’S CAUSED WIDESPREAD LAYOFFS AND SPENDING CUTS IN CANADA AND THE U.S. BUT THERE ARE LOTS OF SURVIVORS, TOO, AND THEY ARE QUICKLY ADAPTING